Chapter 1
THE NATURE OF FRAUD
Discussion Questions
1. Fraud always involves deception, confidence, and trickery. The following is one
of the most common definitions of fraud:
a. “Fraud is a generic term, and embraces all the multifarious means which
human ingenuity can devise, which are resorted to by one individual, to
get an advantage over another by false representations. No definite and
invariable rule can be laid down as a general proposition in defining
fraud, as it includes surprise, trickery, cunning and unfair ways by which
another is cheated. The only boundaries defining it are those which limit
human knavery.”
Fraud is deception that includes the following elements:
1. A representation
2. About a material point
3. That is false,
4. Intentionally or recklessly so,
5. Which is believed
6. And acted upon by the victim
7. To the victim’s damage.
,Fraud affects individuals, consumers, and organizations in various ways. Fraud
usually lowers organizations’ net income dollar for dollar. To recover these costs,
consumers and individuals must pay more for goods and services. For example,
health care fraud and insurance fraud increase premiums that individuals must
pay. The cost of fraud eventually reaches every part of the economy, including
individuals, consumers, and organizations.
The 2008 study by The Association of Certified Fraud Examiners estimates that
U.S. organizations lose roughly 7 percent of their annual revenues to fraud.
Applied to the U.S. gross domestic product (GDP), this 7 percent figure translates
to approximately $994 billion in fraud losses.
a. Employee Embezzlement: In this type of fraud, employees deceive their
employers by taking company assets. Embezzlement can be either direct
or indirect.
b. Management Fraud: Distinguished from other types of fraud both by the
nature of the perpetrators and by the method of deception. In its most
common form, management fraud is deception perpetrated by top
management’s manipulation of financial statements. The victims of
management fraud are typically stockholders, lenders, and others who rely
on financial statement information.
c. Investment Scams or Consumer Scams: A type of fraud that is
perpetrated when fraudulent and usually worthless investments are sold to
unsuspecting investors.
d. Vendor Fraud: Perpetrated by vendors; comes in two main varieties:
fraud perpetrated by vendors acting alone, and fraud perpetrated through
collusion between buyers and vendors. Vendor fraud usually results in an
, overcharge for purchased goods, the shipment of inferior goods, or the
nonshipment of goods even though payment was made.
e. Customer Fraud: Usually involves customers not paying for goods
purchased, getting something for nothing, or deceiving organizations into
giving them something they should not have.
a. Criminal law is the branch of law that deals with offenses of a public
nature. Criminal laws generally deal with offenses against society as a
whole. Violators of criminal laws are prosecuted either federally or by a
state for violating a statute that prohibits some type of activity.
b. Civil law is the body of law that provides remedies for violations of
private rights. Civil law deals with rights and duties between individuals.
The purpose of a civil lawsuit is to compensate for harm done to an
individual. Unlike criminal cases, where juries consist of 12 jurors, juries
in civil cases may have as few as six jurors, and the verdict of the jury
need not be unanimous. Additionally, judges often hear civil cases instead
of juries. In civil lawsuits, plaintiffs must only prove their case by the
“preponderance of the evidence.” In other words, there need be only
slightly more evidence supporting the plaintiff than supporting the
defendant.
a. Civil
b. Criminal
c. Civil
d. Criminal
e. Criminal
f. Civil
, g. Criminal
h. Civil
THE NATURE OF FRAUD
Discussion Questions
1. Fraud always involves deception, confidence, and trickery. The following is one
of the most common definitions of fraud:
a. “Fraud is a generic term, and embraces all the multifarious means which
human ingenuity can devise, which are resorted to by one individual, to
get an advantage over another by false representations. No definite and
invariable rule can be laid down as a general proposition in defining
fraud, as it includes surprise, trickery, cunning and unfair ways by which
another is cheated. The only boundaries defining it are those which limit
human knavery.”
Fraud is deception that includes the following elements:
1. A representation
2. About a material point
3. That is false,
4. Intentionally or recklessly so,
5. Which is believed
6. And acted upon by the victim
7. To the victim’s damage.
,Fraud affects individuals, consumers, and organizations in various ways. Fraud
usually lowers organizations’ net income dollar for dollar. To recover these costs,
consumers and individuals must pay more for goods and services. For example,
health care fraud and insurance fraud increase premiums that individuals must
pay. The cost of fraud eventually reaches every part of the economy, including
individuals, consumers, and organizations.
The 2008 study by The Association of Certified Fraud Examiners estimates that
U.S. organizations lose roughly 7 percent of their annual revenues to fraud.
Applied to the U.S. gross domestic product (GDP), this 7 percent figure translates
to approximately $994 billion in fraud losses.
a. Employee Embezzlement: In this type of fraud, employees deceive their
employers by taking company assets. Embezzlement can be either direct
or indirect.
b. Management Fraud: Distinguished from other types of fraud both by the
nature of the perpetrators and by the method of deception. In its most
common form, management fraud is deception perpetrated by top
management’s manipulation of financial statements. The victims of
management fraud are typically stockholders, lenders, and others who rely
on financial statement information.
c. Investment Scams or Consumer Scams: A type of fraud that is
perpetrated when fraudulent and usually worthless investments are sold to
unsuspecting investors.
d. Vendor Fraud: Perpetrated by vendors; comes in two main varieties:
fraud perpetrated by vendors acting alone, and fraud perpetrated through
collusion between buyers and vendors. Vendor fraud usually results in an
, overcharge for purchased goods, the shipment of inferior goods, or the
nonshipment of goods even though payment was made.
e. Customer Fraud: Usually involves customers not paying for goods
purchased, getting something for nothing, or deceiving organizations into
giving them something they should not have.
a. Criminal law is the branch of law that deals with offenses of a public
nature. Criminal laws generally deal with offenses against society as a
whole. Violators of criminal laws are prosecuted either federally or by a
state for violating a statute that prohibits some type of activity.
b. Civil law is the body of law that provides remedies for violations of
private rights. Civil law deals with rights and duties between individuals.
The purpose of a civil lawsuit is to compensate for harm done to an
individual. Unlike criminal cases, where juries consist of 12 jurors, juries
in civil cases may have as few as six jurors, and the verdict of the jury
need not be unanimous. Additionally, judges often hear civil cases instead
of juries. In civil lawsuits, plaintiffs must only prove their case by the
“preponderance of the evidence.” In other words, there need be only
slightly more evidence supporting the plaintiff than supporting the
defendant.
a. Civil
b. Criminal
c. Civil
d. Criminal
e. Criminal
f. Civil
, g. Criminal
h. Civil
